Many members of the business community are involved in the not-for-profit sector, either as Executive Director of a charity or as a Board member or volunteer for a nonprofit organization. Generally speaking, most people get involved with charities because they believe in the mission of the organization and want to find a way to share their intellectual, spiritual, physical and/or monetary gifts with the community. This week’s post looks specifically at members of Boards of Directors. Although most people get into nonprofit Board service with nothing but good intentions, it is important for Directors as well as the organizations themselves to remember the legal obligations of Board members, which assume that the Director is always going to act in the discretion of the organization.
There are three responsibilities that nonprofit Boards must maintain: the Duty of Care, the Duty of Loyalty and the Duty of Obedience. We will take a quick look at all three.
Duty of Care:
Various nonprofit advocacy websites define this duty differently, but the underlying tenet of this facet of directorship is that Board members must be able to adequately plan and incorporate decisions with a reasonable amount of foresight and information, all to form an outcome that is in the best interest of the organization. Controversial decisions or activities beyond the exempt purpose of the organization can increase scrutiny upon the Board as it relates to this duty. The duty of care has more to do with organizational assets than the other two duties.
One way to help uphold the duty of care is to retain valid third-parties for consultation. Whether it is an attorney, an accountant or an investment advisor, getting insight from an unrelated party will help an organization’s Directors fulfill their obligations.
Duty of Loyalty:
This precept declares that the members of the Board must act in the best interest of the organization ahead of themselves. Some professional firms have requirements of staff that they sit on a nonprofit Board; these constraints put employees in a bad position because they may be in danger of breaching the loyalty duty by joining the Board as a means to appease their employer and/or advance in their particular field.
One organization that I ran into years ago had been the victim of a fraud by their former Treasurer. Years after that defalcation, they still had a trustee who owned a business that engaged in significant transactions with the nonprofit organization. The interaction between the organization and the trustee’s company appeared to be legitimate, but the appearance of the relationship was not ideal given the history of the organization.
The duty of loyalty reminds me of a particular Calvin and Hobbes comic strip:
A conflict of interest policy can help in the satisfaction of the duty of loyalty. This sort of document identifies areas where a Board member may not be impartial. Conflicts should be identified and updated regularly, and Directors who have a personal interest at stake should abstain from voting on motions that are particularly sensitive to their own welfare.
Duty of Obedience:
Some will refer to this as the duty of fidelity, and it requires all Board members to act consistently with the stated mission and purpose of the organization. Forming nonprofits requires an organization to state its exempt purpose(s), which is the basis for being granted IRS approval. Unlike the duty of loyalty, which one Director alone may breach, the duty of obedience generally pertains to the Board at large.
Various filings and reports of nonprofit organizations are freely available to the public upon request so that potential donors understand the mission of the organization that they want to support. A Board that does not act in accordance with its stated mission is not following its obedience duty and may unwittingly deceive the public who believes that they are funding a different philosophy.
Overall, Board service is a very worthwhile and rewarding way to aid the community, but being aware of the duties that Board positions require will help protect both the Director and the organization.
By Dan Massey, CPA, Manager